Going Dutch

A bitter battle to take control of banking giant ABN Amro has dominated the financial headlines in the past few weeks. But with the Dutch bank facing a shareholder rebellion, a multi-billion dollar lawsuit and a hostile takeover bid to chop the business up, the immediate future looks far from smooth for the embattled lender. FST takes a close look.

By Julian Rogers

With a warm handshake and smiles to the awaiting media ABN Amro Chief Executive Rijkman Groenink and his Barclays counterpart John Varley looked set to cement the world’s largest ever banking takeover. A UK£45 billion all-share offer from UK-based Barclays was on the table and management of both sides were bullish about how the deal would create the world’s fifth largest bank. However, in the space of a few short weeks a series of twists and turns have left the merger hanging in the balance and Groenink facing a revolt from shareholders over his failure to consider rival bidders, as opposed to his preferred choice – Barclays.

Indeed, while a buoyant Groenink and Varley were unveiling the merger at a press conference, Royal Bank of Scotland (RBS), heading up a three-pronged takeover bid, was lurking in the background to gate crash the party. The consortium, which also includes banking heavyweights Santander and Fortis, has since tabled a UK£49 billion hostile takeover bid for ABN Amro – made up of UK£35 billion in cash and the rest in RBS shares. The trio plan to slice up ABM Amro – a move that is vehemently opposed by the unions and bosses who argue that it could lead to mass layoffs. Under the proposal Santander would take over ABN Amro’s business in Latin America, Fortis would secure Dutch operations, while RBS would snap up offices in Asia and the Dutch bank’s lucrative US arm – LaSalle Bank.

And this is the potential deal-breaker in the whole battle. ABN Amro had agreed to sell LaSalle to Bank of America (BoA) for US$21 billion but a Dutch court blocked the move, ruling that it was illegal without investor approval. RBS launched a considerably higher counter-offer of UK£24.5 billion on conditional acceptance of its €38.40-a-share offer for the rest of ABN Amro. This was rejected by the management, much to the frustration of RBS chiefs who acclaimed its bid as a “superior proposal” to the offer put forward by its American rival. ABN Amro said there was “uncertainty and execution risks” with the offer for LaSalle, a highly sought after asset in the bank’s stable. It also said that despite repeated requests for assurances, the consortium had failed to provide evidence of how it would finance the purchase.

ABN Amro refused to accept the conditions of the RBS offer for LaSalle, which stipulated that the rest of the bank had to be sold to Santander and Fortis. Angry ABN Amro shareholders believe that management gave the green light to the sale of LaSalle to BoA as a “poison pill” to deter RBS from the race.

As you would expect, BoA chiefs were slightly vexed when news surfaced of the feeding frenzy taking place across the Atlantic and the court’s decision. Indeed, in a fresh twist to this complex struggle, a furious BoA has announced that it intends to sue ABN Amro over the collapsed deal and get an injunction to stop any other bidder from landing LaSalle. The level of damages has not been specified but speculation is rife that it could be as much as US$220 billion – ten times more than the original offer for LaSalle.

Fork in the road

So where does ABN Amro go from here. Well, following the court’s announcement ABN Amro shareholders will have the opportunity to decide which offer to accept. This is despite the fact that the bank’s bosses have said that the Barclays deal is a merger, while the consortium’s proposals amounts to a carve-up of the bank’s assets. If a deal is approved more than 70 regulators worldwide would have to rubber stamp elements of the proposed merger; so a swift sale looks unlikely. Barclays had said that it expected to complete the proposed merger by the fourth quarter of 2007.

With Groenink facing a backlash from disgruntled shareholders, an extraordinary general meeting has been arranged for investors to express their views. As it stands ABM Amro needs the seal of approval from shareholders to sell LaSalle – putting the future of the Barclays deal in jeopardy. Meanwhile, the consortium is thought to be considering shareholder opinion before deciding whether to launch a hostile bid for the whole company. To add to matters, hedge funds are involved in this struggle. London-based Children’s Investment Fund, an activist hedge fund and ABN Amro investor, was the first to call for the break-up or sell off of the bank. Other hedge funds have since jumped on board hoping to make a quick buck from any future sale.

In the meantime Barclays and ABN Amro are keeping their cards close their chests when it comes to where the deal goes next. However, speaking after the press conference Varley was exited about the proposed merger and the benefits it would deliver for Barclays and its shareholders. “This is the largest transaction in the history of the financial services industry and it's by far the biggest cross border merger that has ever taken place,” he explained. “So the merger of Barclays and ABN liberates a very substantial economic opportunity on behalf of our shareholders and creates huge capability, huge firepower on behalf of our customers and our clients.”

So what does Barclays hope achieve by enlarging the business in this way?

“Higher growth is really the driver of it,” said Varley. “We've been driving very significant growth in Barclays over the course of the last years. Our financial performance makes that very clear. I believe we can accelerate, relative to that growth rate, through the merger with ABN.” If successful in its bid, Varley has also stated that Barclays would be willing to up sticks from London and relocate the enlarged group to Amsterdam – the headquarters of ABN Amro.

Bob McDowall, Senior Analyst at TowerGroup, says this merger would impact heavily on the global banking landscape. “The merger between ABN AMRO and Barclays would place four European-owned banking institutions in the global top 10 by market capitalisation to complement two Japanese and four US-owned banking institutions. Although this is a merger between two major European banks, the consequences are of more global importance than European importance.” So what sort of efficiency savings would the new company see? “Business developments and market events will dilute the importance of efficiencies in the global context. However, the anticipated savings may continue to have regional significance in the European context, especially in retail banking.”

Heads will roll

Meanwhile, back at ABN Amro those all-important shareholders are sharpening their knives, frustrated by Groenink’s unwillingness to sell to the highest bidder and for his backing of the LaSalle deal with BoA. Dutch shareholders’ rights group VEB, which claims to represent investors owning 20 percent of ABN Amro, is calling for the beleaguered boss to resign.
VEB Director described the court’s ruling as a “historic decision”. He also said he doubted that Groenink would be able keep his job, given that he had “chained himself so severely fast”, to a single plan. “The credibility of Groenink is seriously in doubt,” he said. Hedge fund TCI, which has a three percent stake in the bank said the court’s decision “will not only benefit ABN Amro shareholders, but will set an important precedent for European corporate governance going forward.”

The court felt that ABN Amro had tried to deceive shareholders by announcing the sale of LaSalle to BoA at the same time as the Barclays merger in a bid to package it as a signed and sealed agreement. Judge Hubb Willems, of the Amsterdam Superior Court, said: “By coupling the sale [of LaSalle] with Barclay’s offer, ABM Amro tried to present shareholders with a done deal that cannot be separated from the sale itself.” The court ordered that the sale be frozen for shareholder vote, although a date has not yet been set.

As FST went to press the future of ABN Amro looked no clearer, although rumours were circulating that RBS may decide that enough is enough and throw in the towel on the deal if it can’t get hold of LaSalle. The US subsidiary, based in Chicago, is ranked as a top 20 bank with US$113 billion in assets and would add considerable value to RBS’s growing portfolio in the US.

For the moment the industry is keeping a close eye on developments and pondering whether the ABN Amro sale will signal a flurry of future cross-border mergers and takeovers. Without a doubt, ABN Amro is a prized asset - one that four financial heavyweights are desperate to get a piece of. Who will succeed? We will just have to wait and see, but with thousands of jobs on the line, including Groenink’s, the potential winner of the race for ABN Amro is far from home and dry.